The Minimum Wage

Brad Delong suggests the U.S. should raise the minimum wage.

I find this view baffling, at least when it comes from economists (Brad is not alone among economists in supporting the minimum wage, but such economists are probably in the minority).

Yes, existing evidence does not suggest the U.S. minimum wage reduces employment to a substantial degree.

That is because the U.S. minimum wage has typcially been only mildly above the free-market wage for unskilled labor.  No one doubts that a minimum wage of, say, $20 an hour, would have substantial disemployment effects.  So the U.S. minimum wage has been a mild policy with mild effects.  That in no way implies those effects are good.

In particular, the minimum wage has no efficiency justification; the only possible reason for a minimum wage is helping low-wage workers.  But the minimum wage is a crude instrument for redistributing income.  Some low-wage workers get higher wages as the result of the minimum wage.  But if there are any disemployment effects, other workers get zero wages as the result of the minimum wage.  That is hardly a sensible way to redistribute income. 

More broadly, a plausible way for employers to circumvent the minimum wage is to hire low-skill teenagers, including those from middle class families, instead of low-skill adults, who might be the main providers for their families.  Under this scenario, employment does not change but the distributional effects are perverse.

A further problem is that minimum wage laws encourage non-economists to think that low wages are the fault of evil, profit-seeking employers.  In fact, low wages occur because some workers have low skills.  The minimum wage does nothing to increase these skill levels; indeed, minimum wages reduce the incentive to acquire skills since some workers get higher wages anyway.

None of these objections to the minimum wage rules out compassion for, or redistribution toward, those who cannot provide for themselves.

But the sensible approach is a policy like the negative income tax that explicitly targets those with low incomes.  Minimum wages distort the labor market with, at best, mixed distributional consequences .

Comments

[Gabriel Mihalache]

There's only one reason why someone would want to do something like that, and that is sheer populism. That fits the bill of any party, but as far as the US goes, I guess Democrats have an edge in that area. :-) That's the reason why we have to talk directly to the public and show, with solid theory, why naive intuitions can sometimes do more harm that good.

[jason]

Let's not forget that a higher minimum wage also increases the incentive for employers to mechanize labor.

[Mike Huben]

Let's see. Miron starts with an argument from personal incredulity. That's worth nothing.

Then he talks about microeconomic efficiency, ignoring the fact that minimum age has macroeconomic repercussions.

Then he speculates on employer behavior, without any evidence.

And to cap it all off, he complains about minimum wage distorting labor markets, and prefers a negative income tax: without noting that negative income taxes come with their own distortions. Which distorts worse? He won't tell us.

Really, such shoddy repetition of ideological talking points is hardly worth it.

[remo williams]

Miron provides the outline of an analysis weighing costs and benefits of increasing the minimum wage.

DeLong, despite being a Berkeley economist offers nothing. Just a stamp saying he agrees with Reich.

Maybe DeLong is right, but why won't he explain why? Instead he deleted my post asking for a brief explanation.

[James]

Huben,

If you want, you can always find that Miron's comments (being finite, after all) leave something out, in this case macro level effects of a minimum wage, empirical analysis of employer behavior, comparative forecasts of the efffects of minimum wage hikes vs. alternative policies. And if your goal is simply to convince yourself that you are criticizing libertarianism, that might be the thing to do. Using words like "shoddy" and "ideological talking points" might also help you convince yourself of this. But it doesn't really provide much insight towards policy selection.

On the other hand, you could do the libertarian readers of this blog a favor and actually criticize Miron's position from its strengths. As I read it, Miron's post isn't supposed to be the definitive argument on the minimum wage. He's explaining how to set up the problem. (What is the intent of a minimum wage increase? Is the minimum wage actually compatible with that goal? What other policies might be proposed toward the same end? What are the comparative benefits and costs of the available policy options?)

What you want to dismiss as speculation isn't. Deciding what magnitudes might matter in the analysis has to happen before analyzing data. (Is your mention of macro effects without any numbers speculation?)

If you think he's setting up the problem the wrong way, fine, but that's no mark against libertarianism. That's an opportunity for for you to make a sustained argument rather than just a dismissal of "talking points."

If you just dislike any discussion by libertarians of what factors need to be considered in policy selection, that probably is informative about something or other, but not about libertarianism.

[Mike Huben]

James, arguments are never attacked through their strengths: it is the weak links that are important, where the errors lie.

Don't tell me he's merely setting up how to think about the problem: he's ignoring the hard parts and the weak links. It's a propaganda tactic common to most ideologies. And it's a pattern he repeats over and over. That's what makes his arguments mere rhetoric, and not any sort of analysis.

Those who prefer ideology to critical thinking might like his approach, but I don't.

[Chris]

Mike, you are quick to shoot down short thought provoking essays as incomplete but have yet to offer any sort of "better approach." Meanwhile you just make yourself look like a fool.

[Mike Huben]

Cris, you may call them "thought provoking essays", but in the business they are called "public relations" or "propaganda".

Did you think Bush's arguments on going to war in Iraq were "thought provoking" or "propaganda"? Who's the fool if they thought the former?

[James]

Huben,

"Don't tell me he's merely setting up how to think about the problem: he's ignoring the hard parts and the weak links."

You have convinced us all that you believe Miron is a propagandist. Wow! But (like DeLong's pro mimimum wage post), that really doesn't help anyone understand why raising the minimum wage is a better idea than the alternative courses of action or even why it's a good idea. Maybe explain what these "hard parts" are and make a case as to why they are relevant and how they support the case for raising the minimum wage. Or continue to repeat (over and over) your assertion that Miron is an ideologically motivated propagandist as though the accusation undermines his arguments. I'm beginning to think some unscrupulous libertarian organization has you on payroll...

[Chris]

Mike, it is just as easy to dismiss your arguments as anti-libertarian propoganda. Especially since the only thing that you have done is dismiss Miron's theory out of hand without actually supporting your argument.

You cannot refute someone's argument by questioning their motives, if you think his analysis is lacking, point it out instead of hiding behind name calling.

[Mike Huben]

Chris, I did point out how his analysis is lacking, in roughly 5 ways.

James: do your own research, and make up your own mind. I'll spend my scarce time showing why you shouldn't be satisfied with Miron's propaganda, why you should be looking for better arguments.

Of course, many people simply want confirmation of what they want to believe. If that's the case, if critical thinking is your bane, feel free to skip my comments.

[Jeff]

Mike,

I think you fail to realize that some of Miron's statements, which you criticize as "ideological talking points," are, in fact, widely accepted results of both economic theory and empirical research. I don't claim to have a wide body of economic research committed to memory, but only a quick search of the NBER's working paper series and/or google are required to turn up serious research supporting claims that you (rudely) dismiss out of hand.

Consider the following research abstracts, which support the claim that the Earned Income Tax Credit (a negative income tax) is better targeted at low-income households than the minimum wage:

"This paper documents the declining relationship between low hourly wages and low household income over the last half-century and how this has reduced the share of minimum wage workers who live in poor households. It then compares recent and prospective increases in the earned income tax credit (EITC) and the minimum wage as methods of increasing the labor earnings of poor workers. Data from the Current Population Survey (CPS) are used to simulate the effects of both programs. Increases in the EITC between 1989 and 1992 delivered a much larger proportion of a given dollar of benefits to the poor than did increases in the minimum wage from $3.35 to $4.25. Scheduled increases in the EITC through 1996 will also do far more for the working poor than raising the minimum wage."

-From "Public Policies for the Working Poor: The Earned Income Tax Credit versus Minimum Wage Legislation," by Burkhauser, Couch, and Glenn, Discussion Paper no. 1074-95 for the Institute for Research on Poverty.

"This paper evaluates the effects of the earned income tax credit (EITC) on poor families. Exploiting state-level variation in EITCs, we find that the EITC helps families rise above poverty-level earnings. This occurs by inducing labor market entry in families that initially do not have an adult in the workforce. Evidence based on the federal EITC is less supportive of a positive impact of the EITC on poor families. Finally, our results suggest that for the range of policy changes typical of recent history in the U.S., the EITC is more beneficial for poor families than is the minimum wage."

-From "USING THE EITC TO HELP POOR FAMILIES: NEW EVIDENCE AND A COMPARISON WITH THE MINIMUM WAGE," by David Neumark and William Wascher, NBER working paper #7599

Miron's posts might be better if they made more direct references to economic literature, but in this setting it hardly seems appropriate to demand that every discussion-provoking post be backed by a literature review.

[James]

Huben,

"I'll spend my scarce time showing why you shouldn't be satisfied with Miron's propaganda, why you should be looking for better arguments."

Quit repeating yourself. We all know you can call Miron's arguments propaganda. Even if they are (I think you have to repeat this enough times and it'll become true, right?) that doesn't preclude the possibility that he'll be the one presenting the "better argument."

Regarding better arguments, I've not seen many good (by my standards) arguments for raising the minimum wage. Moreover, I've never in my life seen a good (by your standards) argument for raising the minimum wage. That is, I could respond to any of the arguments in favor of increasing the minimum wage by asserting that the people who make them are propagandists, or that they leave out the hard parts, or that they are ignoring reality for ideological reasons, etc.